Limited Liability Definition
The term “limited liability” is used in business circles to indicate legal protections from certain issues that could arise in the course of doing business.
Essentially, it means that a private individual is protected from the financial burdens that a business they are a shareholder in may encounter.
When you have limited liability it means that you can only lose so much money if something should go wrong with a company of which you are a partial owner.
What is Limited Liability?
This is an important concept for investors to understand, because, as a shareholder of a company, you are in essence the owner of a very small part of it.
However, because of limited liability, in the worst-case scenario, you are only liable for up to the amount of money that you have invested in the company.
A reality of investing is that sometimes companies do go bankrupt or fail.
However, the debts a company may incur leading up to or after failure are the responsibility of the company, not of a shareholder who has limited liability.
This is what separates and protects an investor who puts money into these types of companies.
This differs from being a partner or owner in a company where you have unlimited liability.
Related: What is Business Liability Insurance?
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